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Don't call it a stimulus

Posted: Monday, September 13, 2010

Stimulus spending has been the core of President Obama's economic policy from the start - from before the start, actually, because his $787 billion stimulus plan was designed even before his inauguration. The idea was straightforward: Pump enough money into the economy, and jobs would follow. When Congress passed the package in early 2009, the president and his aides trumpeted it as a triumph.

So it's a striking measure of how effectively stimulus spending has been discredited that Obama and his aides now refuse even to use the word.

"No, no, no," White House spokesman Robert Gibbs insisted Tuesday when he was asked whether the new measures Obama proposed this week add up to another stimulus plan.

Sadly, he's right. The modest pro-business measures Obama announced in his speech in Ohio on Wednesday are too meager to even qualify as a full-fledged stimulus package.

The biggest proposal - allowing businesses to deduct the full cost of capital investments immediately - is a good idea, but it merely accelerates deductions the businesses would have taken later.

"It's very thin gruel," said Bruce Bartlett, a former Reagan White House aide who has been reborn as a Keynesian.

Moreover, as administration officials took pains to point out, most of the new measures would be paid for by reducing corporate tax breaks and subsidies, especially on the oil and gas industries. When new spending is offset by new revenues, the spending may have a good effect, but it's not a classic stimulus.

Finally, none of the measures Obama proposed Wednesday is likely to make it through Congress - at least, not in the two months remaining before election day. Even before Obama finished explaining his proposals, House Republican leader (and would-be speaker) John A. Boehner of Ohio dismissed them as "more of the same failed stimulus spending." (That slanderous word again!)

Never mind that Republicans have proposed some of the same ideas in the past; they're not about to hand the Democrats a legislative victory in the last weeks before the election, and they're not going to increase corporate taxes, not even on oil and gas.

Obama's goal was not only to show that he's still trying to revive the flagging recovery but to propose some business-friendly ideas that would blunt the Republican charge that he's too hard on the private sector - and dare the GOP to oppose them.

But if there's anything this year's Republican Party has practice at, it's opposing. There's no reason to expect anything in Congress but gridlock for the next two months. After that, if Republicans take control, will Obama and the GOP learn to cooperate? Not likely.

On economic policy, the gridlock is, in a sense, legitimate. As Obama acknowledged, the two parties are far apart on basic principles. And their respective economists are gridlocked too - even on the question of why Obama's stimulus didn't create more jobs.

Liberal economists say the stimulus didn't work because it was too small and too slow. Obama's chief economist at the time it was designed, the now-departed Christina Romer, wanted at least $1.2 trillion; and Rep. David Obey, D-Wis., chairman of the House Appropriations Committee, says he wanted $1.4 trillion. But Obama's chief strategists, Rahm Emanuel and Lawrence Summers, predicted accurately that Congress would choke on numbers that big. What they got was $787 billion, but only about $700 billion was, strictly speaking, stimulus money - about half of what Obey wanted.

The administration says the stimulus worked but the recession was worse than it realized, which is really just another way of saying it didn't work because it was too small.

Conservatives say the stimulus didn't work for several reasons: Some say it was too big; some say it was inefficient; some say it raised an expectation of tax increases down the road and so caused consumers and businesses to save their cash, take fewer risks and do less hiring.

Economists in both camps say the stimulus didn't work because it sent too much spending toward long-term projects in energy, education and transportation, and not enough into immediate pump-priming.

But that leaves all parties gridlocked on what to do next. The liberals want more stimulus; the conservatives want less spending and, if possible, lower taxes.

It's tax cuts that are likely to spark the biggest battles. The cuts President George W. Bush passed a decade ago are due to expire at the end of this year. Obama wants to extend them for couples who make less than $250,000 but end them for the 2 percent of households over that line. Republicans want to make them permanent for rich and poor alike.

This issue may be the one thing capable of forcing compromise across the aisle, because if nothing is done, the tax cuts disappear, and almost everyone agrees that would be bad for the economy, especially as the 2009 stimulus package starts to run out.

As Obama's former budget director, Peter Orszag, wrote recently in the New York Times: "No one wants to make an already stagnating jobs market worse. ... There is little reason not to extend the tax cuts temporarily."

On Wednesday, Obama was fiery about ending tax cuts for "millionaires and billionaires," saying the country simply can't afford the $700-billion tab for extending them. Democratic political strategists say it's an issue that can help bring their party's faithful to the polls, and that the president would look weak if, after years of denouncing the tax cuts, he did a flip-flop now.

But after the November election, it seems increasingly likely that a lame-duck Congress will extend the tax cuts for everyone. And that will be the only form of stimulus we're likely to see for a while.

It's not what either party would choose if it governed alone; neither side will have the luxury of testing its economic theory to see what works. But in a time of gridlock, it's the muddle of political compromise, not the clarity of economic strategy, that rules the day.

• Doyle McManus is a columnist for The Los Angeles Times. Readers may send him e-mail at doyle.mcmanus@latimes.com.



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